The primary municipal market chugged along on Wednesday, as the two biggest deals of the week priced.
Citi priced the Chicago Sales Tax Securitization Corp.’s $605.49 million of taxable bonds. The deal is rated AA-minus by S&P Global Ratings and AAA by Fitch Ratings and Kroll Bond Rating Agency. The deal was increased from the originally scheduled $551 million.
"Today, the Sales Tax Securitization Corporation sold approximately $605 million in bonds, representing the final tranche of an authorized $3 billion program, to refund City of Chicago General Obligation bonds for savings," said a spokeswomen for the city. "The creation of the STSC and issuance of AAA rated debt has resulted in more than $700 million in budgetary savings for the City over a five-year period."
The deal was 1.1-times oversubscribed between 35 investors - 11 of whom were new to the STSC. There was also $140 million of orders from three international investors in Europe and Asia including an investor from Taiwan, representing the first sale of municipal revenue bonds to Taiwan Life Insurer since the new regulation went into effect permitting them to invest in revenue bonds. All in all, the deal achieved present value savings of 3.8%.
Barclays priced the New York City Municipal Water Finance Authority’s $475 million of water and sewer system second general resolution revenue bonds. The deal is rated Aa1 by Moody’s Investors Service and AA-plus by S&P and Fitch.
Morgan Stanley priced Miami-Dade County’s $233.30 million of water and sewer system revenue bonds for institutions on Wednesday after a one-day retail order period. The deal is rated Aa3 by Moody’s, AA-minus by S&P and A-plus by Fitch.
Wednesday’s bond sales
Secondary market
Municipal bonds were mostly stronger on Wednesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as many as two basis points in the one- to 11-year and 15- to 29-year maturities. The 12- to 14-year maturities saw yields higher by no more than one basis point and the 30-year maturity was flat.
High-grade munis were also mostly stronger, with yields calculated on MBIS' AAA scale falling as much as two basis points in the one- to 12-year and 15- to 28-year maturities. The 14- and 29- to 30-year maturities saw yields rise by no more than a basis point. The 13-year maturity was unchanged.
Municipals were mixed on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation unchanged, while the 30-year muni maturity was higher by one basis point.
On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 80.5% while the 30-year muni-to-Treasury ratio stood at 98.7%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Morgan Stanley’s muni bond monthly report
Investor interest in municipals in early 2019 is affected by healthy reinvestment demand, benign credit conditions, a flatter yield curve, as well as depressed supply due to limitations placed on the abilities to advance-refund debt, and personal income tax reductions passed during the Tax Cuts and Jobs Act, according to analysts from Morgan Stanley Wealth Management.
Adding to the manageable demand is the decreasing anxiety over potential changes to the municipal bond tax exemption, analysts Matthew Gastall, executive director, and Monica Guerra, Vice President wrote in a Jan. 16 weekly report.
“Potentially intensifying these impacts, our market now stands in the midst of yet another January Effect, the annual period when redemption-driven reinvestment demand often increases and primary market volume declines,” they wrote.
“The visceral impression of this year’s impact may be slightly misleading, however, particularly when noting that municipal bond mutual fund flows were starkly negative throughout the fourth quarter while last week’s calendar ushered in roughly $7 billion in issuance,” the analysts said.
Though municipal bond mutual funds posted outflows to end 2018, exchange-traded (ETFs) and tax-exempt money market funds simultaneously documented some of the strongest inflows recorded in years, they said.
The pair predicted that lower nominal interest rates may inspire a quick increase in some competitive issuance. However, recent limitations placed on the abilities to advance refund debt, coupled with the seasonal reality that the new-issue calendar often requires time to appropriately build, suggests that volume should be manageable in the coming weeks, Gastall and Guerra wrote.
Given that last week’s heightened supply was influenced by a handful of large deals, it may be that the broader primary market is not positioned for an overly aggressive January, they continued. The analyst said lower ratios following U.S. Treasury strength suggest short-term caution. In addition, investors should complete semi-annual portfolio reviews and strengthen account positioning accordingly, as well as continue to utilize municipals as a late-cycle “tried-and-true” household asset class.
“Our primary objective focuses on the price action apparent throughout the market over the last two months,” they wrote. “Though municipals tend to underperform UST strength due to a laggard trading response, tax-exempt bond prices advanced alongside the aforementioned activity quite well,” Gastall and Guerra wrote.
“Should this constructive setting encounter a weakening UST backdrop following the recent period of strength, state and local government securities may have little choice but to closely follow USTs.”
“Specifically, if UST prices decline while municipals remain relatively strong, crossover investors will likely sell tax-exempt securities to switch their exposure to taxable ones,” they said. “This dynamic has helped to balance dislocations between the two markets for decades.”
In addition the analysts said investors should monitor macroeconomic developments and watch Treasurys for guidance before municipal seasonal shift, as well as expect a supply acceleration in February.
Overall the firm advocates focusing on high- quality, front-end securities while current levels of additional risk compensation are low. This strategy, they said, provides households with a comfortable intermediary to earn yield without taking excessive risk and should be comparatively more stable if the economy is in a late cycle and/or interest rates rise, according to the pair.
“Investors should also remain vigilant about maintaining exposures to cash and look to blend high-quality taxable counterparts in the very shortest maturities where yields have risen in USTs more than in munis.”
Previous session's activity
The Municipal Securities Rulemaking Board reported 45,588 trades on Tuesday on volume of $11.875 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 16.489% of the market, the Empire State taking 12.276% and the Lone Star State taking 11.52%.
Yvette Shields contributed to this report.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
